Everyone understands extreme weather is a danger to food production. The overuse of antibiotics is less well understood. As this article explains, most antibiotics are given to livestock, which then become breeding grounds for antibiotic-resistant microbes, which are known as superbugs once they develop immunity to all conventional antibiotics.

Almost 80% of all antibiotics in the United States aren’t taken by people. They’re given to cows, pigs, and chickens to make them grow more quickly or as a cheap alternative to keeping them healthy. These drugs could give rise to superbugs—bacteria that can’t be treated with modern medicine—and things are only getting worse. In 2013, more than 131,000 tons of antibiotics were used in food animals worldwide; by 2030, it will be more than 200,000 tons.

Here's the problem with superbugs: you can't kill them with standard-issue antibiotics. They spread like wildfire through monoculture crops and livestock yards and kill with indiscriminate alacrity.

The only solution, poor as it is, is to kill every animal that might be infected--tens of millions or hundreds of millions in the case of African swine fever.

Pigs and chickens are breeding grounds for diseases that jump the low barrier between livestock and humans. So the superbug that starts out killing animals can, with generally modest genetic modifications via variability, start infecting and killing humans with the same alacrity.

While these articles focus on the dangers of superbugs to livestock and humans, superbugs are equally dangerous to cereal and other commodity crops. Blights, fungal pathogens and other plant disease vectors can arise that cannot be controlled by herbicides. Insects undergo genetic modification and become resistant to pesticides. As pesticides become more toxic, more systemic and more ubiquitous, they start killing or weakening the "good" insects global agriculture depends on--the pollinating insects.

Superbugs don't respect national or ideological borders. Every agricultural economy based on monocultures and mass use of antibiotics, pesticides and herbicides is vulnerable to superbugs.

As I've often noted here, centralization itself creates systemic vulnerabilities.A handful of industrial-scale super-farms raising monoculture crops and livestock are exquisitely vulnerable to the rise of superbugs. A thousand smaller farms and livestock operations that manage diseases without antibiotics and chemicals are more resilient, just as matter of distance from each other and the variability of genetic lineages in their crops and livestock.

As many others have pointed out, oil and food production are now essentially one system: industrial-scale agriculture depends on industrial fuels and petrochemical fertilizers; no oil and natural gas, no food.

But we can't eat oil. A nation might have the financial means to buy energy or be blessed with energy resources within its borders, but if superbugs wipe out much of its cereal and other commodity crops and its livestock, its people will go hungry.

And hungry people topple governments. Governments can lie about all sorts of statistics such as unemployment, GDP, inflation and so on, but a government that claims food is abundant when it is actually scarce is a government on its way to the dustbin of history.

The Bastille was torn down by a raging mob in Paris as bread prices skyrocketed beyond the reach of the poor.

So let's project what happens when some nations don't have enough food and others manage to have a surplus. Food becomes the ultimate economic weapon, as long as there's still enough energy to transport it from exporter to importer and distribute it to the hungry mobs.

As this chart from the World Bank shows, the world has enjoyed steadily increasing yields of cereals. Nobody expects a decline back to the levels of 20 years ago, but extreme weather and a handful of superbugs could very quickly reverse this upward trend.

The majority of many commodity crops feed livestock, not humans, and as a general rule it take five or more kilos of grain to produce one kilo of meat. No corn and soybeans, no meat.

Wheat and rice are staples of the human diet, and the exportable surpluses of wheat are concentrated in a few hands.

The same is true of soybeans, a source of protein in Asia and livestock feed everywhere. This chart shows the top producers and the top consumers.

The asymmetry between exporters and importers delineates the power implicit in food. Those with surpluses to sell hold power over those who need the surpluses to feed their restive, hungry populations.

The food-exporting superpowers are easy to identify: The U.S., Russia, Ukraine, France, Brazil, Argentina, Canada, and weather permitting, Australia. This reduces down to three superpower regions: North America at the top, Russia and Ukraine, and Brazil and Argentina, with France replacing Germany as the continental superpower once food matters.

As for rice, the top exporters are India, Thailand and Vietnam. Recalibrate their potential power in the era of food scarcity accordingly.

It only seems farfetched to say that food will, with energy, redefine political power in the decades ahead because the superbugs haven't yet devastated global tradable food. Rivals without enough food will surrender power to those with scarce surpluses to use to reward allies and cripple enemies.

Wednesday, May 22, 2019

If China wants superpower status, it will have to issue its currency in size and let the global FX market discover its price.

Quick history quiz: in all of recorded history, how many superpowers pegged their currency to the currency of a rival superpower? Put another way: how many superpowers have made their own currency dependent on another superpower's currency?

Only one: China. China pegs its currency, the yuan (RMB) to the U.S. dollar. It adjusts the peg a bit here and there, but the yuan's value is set by the Chinese state, not by the market of buyers and sellers.

(Yes, various nations have used gold coins minted by rival powers (Spanish pieces of eight were money everywhere, for example) but we're talking about fiat currencies, backed by nothing but supply and demand, not intrinsically valuable gold coins.)

Second question: is pegging your currency to a rival power's currency a sign of strength? The obvious answer is no. It's a sign of weakness. A real financial power issues its own currency and let's the global FX (foreign exchange) market discover the relative price / value of the currency. The financial power trusts the market to discover the value / price of its currency, and it responds by raising or lowering the yields on its government bonds and other pricing inputs.

If the issuing nation won't allow users and owners of its currency price discovery, few will want the currency because they can't trust the state's arbitrary, non-market price. This reality is reflected in the chart below of global currencies' relative share in global payments, loans and reserves. China's currency, the yuan (RMB) is basically signal noise: its global role in payments, loans and reserves is near-zero.

Why does China cling to state control of its currency's valuation? The obvious answer is that China's economy and global role are too fragile to absorb a major revaluation of its currency up or down: a major loss in purchasing power would raise the cost of energy and other imports, while a major strengthening of the yuan would crush the global competitiveness of China's goods and services.

As for the idea that China will unpeg its currency when it backs it with gold, recall that "backed by gold" means "convertible to gold." If the yuan weakens and other nation-state owners of the currency decide gold is the safer bet, China will have to exchange yuan for gold if it wants to make good on its claim to be backing its currency with gold.

If the currency isn't convertible to gold, it isn't backed by gold at all; it's just another fiat currency backed by nothing.

If China wants superpower status, it will have to issue its currency in size and let the global FX market discover its price. Anything less leaves China dependent on the U.S. and its currency, the dollar.

If China is so powerful, why doesn't it let its currency float on the FX market like other trading nations? Until its currency floats freely like other currencies and the yuan's price is discovered by supply and demand, China's global role in currency payments, loans and reserves will remain near-zero. That is a weakness that appears to be insurmountable.

Tuesday, May 21, 2019

While AI (artificial intelligence) garners the headlines, the next wave of disruptive technologies extend far beyond AI: as the chart of technologies rapidly being adopted shows, this wave includes new materials and processes as well as the "usual suspects" of machine learning, natural language processing, data mining and so on.

While many voices seek to assure us these technologies won't displace human workers, the reality is cutting labor inputs is the core driver. What few pundits seem to understand (perhaps because they've never experienced a truly competitive market?) is that the rush to incorporate these technologies into existing enterprises is deflationary not just to prices but to profits.

Reducing labor inputs and improving productivity of capital and the remaining labor force is not going to generate profits if competitors can access the same tools and processes. The race isn't to maximize profits, it's to survive the inevitable deflationary spiral in prices as competitors are forced to pass along cost savings to customers to retain market share.

As the race to improve technologies speeds up, "good enough" open source software and cheap previous-generation hardware is good enough for most applications. (We can surmise that the Pareto Distribution is active: technology that is 20% of the cost of the newest product can do 80% of what the new product can do, and tech that costs a mere 4% of the latest tech can do 64% of what the latest product can do.)

Everyone counting on trillions in tech profits is overlooking the inconvenient reality of the S-Curve for cheap credit, cheap energy and cheap labor--the three drivers of global expansion. Once credit dries up or becomes more expensive, once cheap energy is only a memory (or future fantasy) and once employment sags under the pressure to reduce labor inputs, the ranks of those with the earnings or credit to buy, buy, buy will be thinned.

Stagnant wages can only be supplemented with borrowed money until the costs of servicing the debt (interest) eats the borrower's budget. At that point, lenders will have to face the unpalatable truth that any additional loan will end in default, a process that will also collapse the entire unsustainable mountain of debt the household is struggling to service.

As many others have pointed out, energy can be abundant but it only drives expansion if it's affordable to low-wage workers. If it's only affordable to the top 20%, every economy based on mass consumption implodes.

One of the factors in the U.S.-China trade dispute that few seem to notice is labor costs are spiraling higher in China, reducing its competitiveness at a critical juncture as global trade, demographics, energy costs and the risk of credit bubbles bursting all form a self-reinforcing confluence of negative dynamics.

China still needs the jobs while its customers (including but not limited to the U.S.) are seeking lower-cost alternatives to Made in China. Even Chinese companies are looking to establish lower-labor cost manufacturing hubs overseas.

Strip away the happy talk about technology creating jobs and we're left with real-world enterprises desperate to lower cost inputs in any way they can: and the go-to "solution" to reducing cost inputs is reducing labor inputs by reducing wages via global wage arbitrage (a.k.a. offshoring jobs) and/or replacing human labor with software and robotics.

Sure, there will be jobs for those installing and maintaining the software and robots, but remember: enterprises don't have profits, they only have costs, and the pressure to eliminate entire layers of managerial costs as well as production costs will only increase.

Who will be willing and able to pay a premium for any technology, product or service if cheaper alternatives are available? As debt service costs rise and wages continue to stagnate, the "solution" of borrowing more reaches an endgame of credit contraction and soaring defaults.

That leaves government-enforced monopolies as the only dependably profitable corporations, and the citizenry will soon tire of enriching tech oligarchs who bought political cover and regulatory moats. Deflation eats credit-dependent, mass-consumption economies alive from the inside.

If you want to understand how the economy is being transformed, look at the intersection of Big Tech, financialization and the central state.

The two dynamics transforming the economy--technology and financialization--are intertwined yet widely viewed as unrelated. Critics and proponents of each largely ignore the other dynamic: critics of institutionalized fraud and other manifestations of financialization implicitly assume the economy will return to some golden age if we get rid of financialization's skims and scams.

They are largely blind to the reality that the speed with which technology is transforming the economy is increasing: there is no golden era to return to. The economy they long for (strong unions, full employment, rising wages, declining inequality, political bipartisanship, financial stability and security, etc.) has already slid into the dustbin of history.

They are equally blind to the reality that the central state they revere as the "solution" to financialization is itself the source of wealth/power asymmetry and the enforcer of Big Tech and Big Finance domination.

Proponents of technology implicitly assume that financialization's skims and scams have no impact on technology's golden promise of glorious advances which both enrich the few who own the technology and free the many to enjoy robots doing their work and endless entertainment (for a modest monthly fee, of course).

They are largely blind to the inconvenient reality that replacing tens of millions of workers with robots and software means there is no longer a mass-consumption economy for all the technological wonders, as the supposed solution--Universal Basic Income (UBI)--can't provide either paid work or enough income for the millions who will be receiving UBI subsistence to borrow or spend enough to keep the consumer economy afloat.

Financialization's solution--creating more credit / debt-- simply insures that the UBI recipients will be devoting much of their subsistence income to debt service rather than tech toys.

In reality, both dynamics reinforce the disruptive effects of the other on non-elites. Financialization concentrates wealth and political power in the hands of those closest to the sources of cheap credit--central banks and private-sector banks.

Financialization enables tech companies to borrow billions on the cheap and use the money to buy back their own shares, increasing the value and further concentrating ownership of the most profitable tech companies.

With billions in profits and credit (via selling low-yield bonds), giant tech corporations have the wherewithal to invest in bleeding-edge technologies--and pay the top researchers sums that cannot be matched by lesser firms.

Companies are faced with Andy Grove's famous summary of technological change: adapt or die. As the chart below illustrates, companies in virtually every sector are being forced to adopt technologies that reduce human labor while increasing productivity. Those who fail to do so effectively enough and soon enough will be outpaced by global competitors.

Unless of course the corporations have enough capital to purchase political power: once a corporation is powerful enough to buy regulatory moats and other forms of political cover, they reap the monopolistic benefits of what analyst Simons Chase calls the negative network effect: they "lock in" their monopoly via regulatory capture and the enforcement of the state.

Consider network effects, the popular economic construct applied to market concentration and increasing returns for strategies pursued by some leading tech companies. This dynamic economic agent is also known as demand side economies of scale.

W. Brian Arthur, the economist credited with first developing the theory, described the condition of increasing returns as a game of strategic positioning and building up a user base to the point where "lock in" of dominant players occurs. Companies able to tap network effects have been rewarded with huge valuations and highly defensible businesses.

But what about negative network effects? What if the same dynamic applies to the U.S.’s pay-to-play political industry where the government promotes or approves of something through a policy, subsidy or financial guarantee due to private sector influence. Benefits accrue only to the purchaser of the network effects, and consumers, induced by the false signal of large network size, ultimately suffer from asymmetric risk and experience what I’m calling a loss of intangible net worth for each additional member after the "bandwagon" wears off.

If this were the case, then you would see companies experience rapid revenue growth (out of line with traditional asset leverage models), executives accumulating huge fortunes and political campaign coffers swelling.

But the most striking feature would be the anti-social outcomes, the ones not available without the instant critical mass of government-supported network effects, the ones that, at scale, monetize a society’s intangible net worth.

In effect, the negative network effect generated by America's pay-to-play political structure creates a winner take most economy in the tech sector that mirrors the the winner take most dynamic of financialization.

Non-elites already live in a winner take most economy--a reflection of asymmetrical concentrations of wealth and power in tech and financial corporations. The commoditization of credit and institutionalized fraud such as corporate buybacks have served to strengthen the negative network effect that arise from the unholy alliance of Big Tech and the central state.

If you want to understand how the economy is being transformed, look at the intersection of Big Tech, financialization and the central state.

Friday, May 17, 2019

Normalizing and institutionalizing fraud undermines the foundations of the economy and the financial system.

I am indebted to Manoj Samanta (twitter: @flation_debate) for the insightful concept the commoditization of fraud. The first step in the commoditization of fraud is to normalize fraud as Business as Usual (BAU) to the point that it's no longer viewed as "wrong," destructive or an aberration of evil-doers but as an accepted way to maximize gain and offload risk onto others.

The last step in the process is to institutionalize fraud within central banking and government policies.

How is selling shares in a money-losing corporation at outlandish valuations not the commoditization of fraud? The fraud has been normalized into a game of hoping that greater fools will be so enamored of the normalized fraud that they'll take the IPO shares off your hands at ever-higher valuations until the fraud breaks down.

But by then, the instigators of the fraud--the IPO--have escaped with billions in gains and zero liability.

How is private equity loading companies up with debt as a means of paying outlandish dividends to themselves not commoditized fraud? How is paying dividends with debt rather than earnings not fraud? The net result of this fraud is the debt-burdened company eventually defaults on its debt, defrauding the investors who were suckered into the scam.

But once again, the instigators of the fraud--private equity--have escaped with billions in gains and zero liability.

How is understating inflation so Social Security retirees get near-zero cost of living adjustments as real-world inflation pushes 7% not normalized, institutionalized fraud? We all understand the motivation for this institutionalized fraud: to limit the increasing cost of Social Security and mask the erosion of household income's purchasing power.

While the Social Security recipient and the minimum wage worker are getting squeezed, those getting nearly free money from the Federal Reserve to plow into stocks are piling up trillions of dollars in gains. How is the Fed's fee money for financiers not commoditized, institutionalized fraud? Those who can borrow outlandishly large sums at a discount are in effect being given the tools to defraud the financial system and all the other players who aren't as close to the money spigot of the central bank.

How is charging 20% interest on a credit card balance while financiers pay 2% not commoditized, institutionalized fraud? The cover for this fraud is particularly rich: the high credit risk of the credit card holder demands a high rate of return, while the "low-risk" financier gets 2% financing to blow up the entire financial system and get bailed out by the taxpayer.

Normalizing and institutionalizing fraud undermines the foundations of the economy and the financial system. Calling these commoditized frauds business as usual doesn't mean they won't destroy the system from the inside.

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